UNDERSTANDINGPRIVATEBUSINESSUSEOFTAXEXEMPTBONDS

Presented by:Caleb Lansky, BLX Group

PRIVATE BUSINESS USE OVERVIEW AND EXCEPTIONS

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The hardest thing to understand in the world is the income tax. Albert Einstein

Postissuancetaxcompliancebeginswiththedebtissuanceandrequiresacontinuingfocusoninvestmentofbondproceedsanduseofbondfinancedproperty.

AftertheBondsAreIssuedThenWhat?AdvisoryCommitteeonTaxExemptandGovernmentalEntities

POSTISSUANCE COMPLIANCEOVERVIEW

501(c)(3)BondRequirements Atleast95%ofthenetproceeds ofthebondissuemustbeusedinamannerrelatedtotheexemptpurposesoftheSection501(c)(3)organization

Nomorethan5%ofthenetproceeds ofthebondissuecanbeusedforaprivatebusinessuseoranunrelatedtradeorbusinessuse

Forthispurpose,costsofissuanceofthebondspaidwithbondproceedsaretreatedasaprivatebusinessuse

Allbondfinancedpropertymustbeownedbya501(c)(3)organizationorStateorlocalgovernmentalunit

2%costsofissuancelimit

PRIVATE BUSINESS USE OVERVIEW

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GovernmentalBondRequirements Generally,atleast90%oftheproceedsofthebondissuemustbeusedforgovernmentalpurposes

Aggregateprivatebusinessusegenerallycannotexceedthelesserof90%,95%or$15million

Costsofissuanceofthebondspaidwithbondproceedsarenottreatedasaprivatebusinessuse

PRIVATE BUSINESS USE OVERVIEW

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$800milliongovernmentalbondissue

PRIVATE BUSINESS USE OVERVIEW

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Need to be mindful of this lesser of concept

Par Amount $800 million $800 million $800 million

Tax Code Limit 10% 5% $15million

Maximum PBU $80 million $40 million $15 million

BasicTaxAnalysisinGovernmentalBondFinancings Arethebondfinancedassetsusedbymembersofthegeneralpublic?

DoesapartyotherthanaStateorLocalGovernmentagencyorentityhaveaspeciallegalentitlementtousethebondfinancedassets?

Privatebusinessusecanariseunderamanagementcontractevenif theassetsservethegeneralpublic

Useofbondfinancedassetsbyacharitableorganization(e.g.,aSection501(c)(3)organization)willgenerallygiverisetoprivatebusinessuse

Contractswiththefederalgovernmentwillgenerallygiverisetoprivatebusinessuse

PRIVATE BUSINESS USE OVERVIEW

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501(c)(3)BondsandPrivateBusinessUse Useofbondfinancedpropertybyotherthana501(c)(3)organizationorastateorlocalgovernment

Examples: Leasestoforprofitentity

Certainmanagementcontractswithforprofitentity

Certainsponsoredresearchcontractswithforprofitentity

Intheseexamples,thetradeorbusinessisprovidedrightstothefacility(i.e.,aspeciallegalentitlement)

PRIVATE BUSINESS USE OVERVIEW

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UnrelatedTradeorBusinessUse Useofbondfinancedpropertybya501(c)(3)organizationinanunrelatedtradeorbusinessactivity

Fortaxexemptbonds thefocusisactivity

Unrelatedtradeorbusinessuseinvolvingbondfinancedpropertywillgenerallyconstituteprivatebusinessuseevenifitdoesnotgiverisetoataxpaymentforunrelatedbusinessuse

PRIVATE BUSINESS USE OVERVIEW

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Contractsthatmay giverisetoprivatebusinessuseinclude: ManagementContracts

GiftShop/BookstoreContracts Physician/PhysicianGroupContracts FoodService/Concession/CafeteriaContracts ParkingManagementContracts

ResearchContracts Federal BusinessSponsored

PRIVATE BUSINESS USE OVERVIEW

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Contractsthatwill generallygiverisetoprivatebusinessuse:

Bydefinition,aleasewillalmostalwayscreateprivatebusinessuse.

CommonExamples: CafeteriaContracts Pharmacies PhysicianOfficeSpaces GiftShops CorporateEvents SolarPanels CellPhoneAntennas

PRIVATE BUSINESS USE OVERVIEW

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Manysocalledmanagementcontractsareinfactleases

Ifsomeoneispayingyourent($)orsplittingprofits($)fromanoperationinbondfinancedspacetheyarenotgenerallytreatedasamanagerunderthetaxrules

PRIVATE BUSINESS USE OVERVIEW

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MANAGEMENT &SERVICECONTRACTS

WhydoSomeManagementContractsGiveRisetoPrivateBusinessUse? Theyrepresentatransferofcontroloreconomicbenefitfromtheownertoaprivateparty

Theyprovideaspeciallegalentitlementtousebondfinancedproperty

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MANAGEMENT &SERVICECONTRACTS

ManagementContractGuidelines Rev.Proc.9713andIRSNotice201467 Safeharborcontractualrequirementsthatifmet,thecontractdoesnotcauseprivatebusinessuse

Sharingorsplittingofnetprofitsisneverpermittedunderthemanagementcontractguidelines

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MANAGEMENT &SERVICECONTRACTS

ManagementContractGuidelines Rev.Proc.9713andIRSNotice201467 TypesofCompensationArrangementsaddressed:

fixedfee capitationfee perunitfee percentageofrevenueorvariablerate variouscombinationsthereof

Durationofcontract Longtermagreementsarerequiredtohavelargerportionoffixedcompensation

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MANAGEMENT &SERVICECONTRACTS

ContractsforaTermof5YearsorLess IRSsignificantlyrelaxedrulesformanagementcontractswithatermof5yearsorless

Compensationbasedonstatedamount,periodicfixedfee,capitationfee,perunitfee,percentageofgrossrevenues,adjustedgrossrevenues,orexpenses(oranycombinationoftheforegoing)arepermitted

Thecontractneednotbeterminablebythegovernmentalunit/501(c)(3)entitypriortotheendoftheterm

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MANAGEMENT AND SERVICE CONTRACTS SAFE HARBORS

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CompensationtoServiceProvider MaximumTerm*underRev.Proc.9713 MaximumTerm*underNotice201467

Atleast95%periodicfixedfee(e.g.,$95peryearfixedfee,withpossibilityofupto$5variableadditionalcomp) 15years Nochange

Atleast80%periodicfixedfee(e.g.,$80peryearfixedfee,withpossibilityofupto$20variableadditionalcomp) 10years Nochange

Atleast50%periodicfixedfee(e.g.,$50peryearfixedfee,withpossibilityofupto$50variableadditionalcomp)

5yearsandcancellablewithoutcausenolaterthan

endof3rdyear

Nochange

Capitationfee(e.g.,perpatientfeeformedicalservices)ormixoffixedfeeandcapitationfee

5years,nocancellationrequirement

Perunitfee(e.g.,$xforeachserviceprovided)

oramixofperunitfeeandperiodicfixedfee(e.g.,$yforeachserviceprovided,plus$xperyear)

3yearsandcancellablewithoutcausenolaterthan

endof2ndyear

%ofgrossrevenues,%ofadjustedgrossrevenues,or%ofexpenses 2yearsandcancellablewithoutcausenolaterthanendoffirstyear

Compensationbasedonastatedamount;**periodicfixedfee;acapitationfee;aperunitfee;oracombinationofthepreceding. Compensationmayalsoincludea%ofgrossrevenues,adjustedgrossrevenues,orexpensesofthefacility(butnotbothrevenuesandexpenses).

NotaSafeHarborunderRev.Proc.9713

5years,nocancellationrequirement

*The maximum term of the contract also cannot exceed 80% of the useful life of the assets. **Includes a productivity award if (a) eligibility for the productivity award is based on quality of services rather than increases or decreases in revenue in expenses of the facility; and (b) the amount of the productivity award is a stated dollar amount, a periodic fixed fee, or a tiered system of stated dollar amounts or periodic fixed fees based solely on level of performance achieved with respect to the applicable measure.

IncidentalContractsorArrangements Janitorialservices

Equipmentrepair

Billingactivitiesorsimilarservices

Landscaping

PRIVATE BUSINESS USE EXCEPTIONS

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ShortTermUse 50DayExceptionforLeases Termofusepursuanttothecontract,includingrenewaloptions,isnotlongerthan50days

Note,focusisontotaluse daysnottermofcontract

Thecontractisanegotiatedarmslengtharrangementandcompensationisatfairmarketrule

Thepropertyisnotfinancedforaprincipalpurposeofprovidingthatpropertyforusebythatparty

* Shorttermuseexceptionsdonotapplytounrelatedactivitiesofthe501(c)(3)organization

PRIVATE BUSINESS USE EXCEPTIONS

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SPONSORED RESEARCH CONTRACTS

UnderTaxRules,SponsoredResearchContractsMayGiveRiseToPrivateUseofBondFinancedProperty Trendingovernmentalandnonprofitorganizationstoundertakemoreresearchactivities

Thesponsoroftheresearchcanvary: NIH Otherfederalgovernment Privatebiotechcompany Pharmaceuticalcompany 501(c)(3) Stateorlocalgovernment

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ResearchContractGuidelines Rev.Proc.2007 47 Permitscertaintypesofsponsoredresearchtobeconductedwithinbondfinancedspacewithoutresearchbeingtreatedasprivatebusinessuse

Appliesonlytobasicresearch anyoriginalinvestigationfortheadvancementofsciencenothavingacommercialobjective

SPONSORED RESEARCH CONTRACTS

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SafeHarbor1 Thesponsormayhaveexclusiveuse andownership ofthelicenseorresultingtechnology

Thepricepaidbythesponsormustbedeterminedatthetimethelicenseorotherresultingtechnologyisavailableforuse(mustpayfairmarketvalue)

SPONSORED RESEARCH CONTRACTS

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SafeHarbor2 Titletoanyproductproducedbyresearchliesexclusively withthe501(c)(3)organization

Sponsor(s)getsonlyanonexclusive,royaltyfreelicensetouseproductofthatresearch

GenerallycoversNIH/BayhDoleActresearch therightsofthefederalgovernment,includingmarchinrights,mandatedbythesuchactwillnotinandofthemselvescausearesearchagreementtofailthesafeharbor

SPONSORED RESEARCH CONTRACTS

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Whatyouneedtoknowtodetermineprivatebusinessuse Whoisusing thefacilities employees,students,outsidegroups,researchagreements,managementcontracts,shorttermuse

Howcontracts relatingtousearestructured safeharborcompliant?Anyleasesofspace?

Hasanyportionofthebondfinancedpropertybeensold

Specifically, howbondproceedswereexpended buildings/facilities/equipment

PRIVATE BUSINESS USE OVERVIEW

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BondProceedsExpenditures Bondrequisitionsoftendontcategorizeexpendituresinamannerconducivetocalculatingprivatebusinessuse.

Aspecific,perhapsmoredeliberateac